AA's problem is simple: It expanded too fast, leaving it unprepared for the recession. It now needs to become a trendier, more exclusive brand to survive, by shrinking its retail footprint and raising its prices. AA's expansion was so poorly conceived that in downtown New York it became almost as ubiquitous as Starbucks (SBUX): It had six stores below 14th Street, a seventh in Williamsburg, and an eighth in nearby Hoboken, N.J. (click to enlarge).

Unfortunately, Luttrell has a lot of responsibility and no power. Lion and BofA relaxed their credit agreement with Charney because the alternative was to demand their combined $121.5 million in debt be paid immediately, which AA cannot do. That would mean Lion and BofA would have to sell or liquidate AA, and be forced to do something they don't want to do: Take cents on the dollars they're owned or become owners of a chaotic fashion advertiser.

What ought to happen is that Lion and BofA should push Charney out of the CEO's office and replace him with an experienced executive. Charney -- who has a genuine talent for picking and marketing new clothes -- could remain as creative director, but he'd have to come under the authority of an operations chief. That won't happen because Charney owns a majority of the company. No one can tell him what to do, no matter how bad things get.